Oracle Losing Software Growth as Business Shifts to Cloud

When Activision Blizzard Inc. needed new software to help it field questions from users of its “Call of Duty” shooter franchise and other games, it held a bakeoff between Oracle Corp. and Salesforce.com Inc.

Oracle lost.

Activision, the world’s biggest video-game maker, wanted applications delivered over the Internet and stored in the cloud, rather than on its own servers, Activision Chief Information Officer Robert Schmid said in an interview.

“Salesforce has really stepped up to the plate,” he said. “I’m much more interested in a cloud application than an on- premises application. I don’t want to do plumbing.”

Companies as varied as Bayer AG, Zynga Inc. and Hewlett- Packard Co. also have opted in recent months for Salesforce over Oracle, evidence of shifting loyalties in the $113.8 billion business-applications market. Some corporations aiming to cut costs and find more flexible ways to run operations are turning to cloud providers like Salesforce and Workday Inc., shunning the kinds of pre-packaged applications made by Oracle that are installed on machines and carry multiyear service agreements.

“Salesforce.com and Workday are taking share and eroding Oracle’s application maintenance stream,” said Brad Zelnick, an analyst at Macquarie Capital in New York, who downgraded Oracle’s stock to neutral in January. “That’s what’s really giving Oracle a run for their money.”

Slower Growth

Evidence of Oracle’s challenges may come later today, when the company releases fiscal third-quarter results. Oracle, based in Redwood City, California, is forecast to report that revenue rose 3 percent in the period that ended in February, according to analysts’ projections compiled by Bloomberg. That would follow a sales gain of 2.5 percent in the second quarter, which was the slowest rate of growth in two years.

The company’s shares have declined 3.3 percent in the past 12 months, compared with a gain of 13 percent for the Standard & Poor’s 500 Systems Software Index. Besides Macquarie, JMP Securities and Jefferies & Co. also have downgraded Oracle’s stock in the past two months. JMP cut Oracle shares to market perform, while Jefferies has a hold rating on the stock.

Workday, a Pleasanton, California-based maker of Web software that helps companies manage human resources and finances, is also gaining ground at the expense of industry stalwarts like Oracle and SAP AG, Europe’s largest software maker.

Workday Moves In

Workday replaced Oracle and SAP systems at companies including Flextronics International Ltd., Kimberly-Clark Corp., Sun Life Financial Inc. and Lenovo Group Ltd. The startup plans to file for an initial public offering this year that would raise as much as $500 million. Workday is aiming for the same companywide software installations that are Oracle’s and SAP’s strong suits.

Salesforce and Workday espouse an approach called “software as a service” that lets customers rent business applications instead of installing them on their own servers. This means companies that want to arm employees with new software don’t have to buy the underlying hardware, databases and the middleware that helps various programs work together. Nor do they have to retain the phalanx of consultants often needed to keep the systems working well.

The enterprise software industry, meantime, has thrived by shipping big upgrades after years-long development cycles, then collecting richly profitable maintenance fees each year for bug fixes, said Salesforce Executive Vice President John Wookey, a veteran of Oracle and SAP who joined Salesforce last November.

Customers’ Burden?

“In that model, the burden for making the software work is on the customer,” said Wookey, who spent a dozen years at Oracle and led development of the company’s new Fusion applications, then worked at SAP from 2008 until last year. “What’s different about the cloud is if people don’t like your software, they’ll stop using it.”

Oracle is still a software powerhouse, many times bigger and more profitable than Salesforce. Excluding options costs and other expenses, Oracle turned an $11.4 billion profit in its most recent fiscal year, compared with Salesforce’s $193.6 million.

There’s also ample chance for Oracle and other large software makers to peel off customers of aging business applications like those made by Lawson Software Inc. and Sage Group Plc. Sensitive data can’t always be stored outside a company’s walls. What’s more, cloud computing companies’ software may actually cost more than the sticker price because some companies need to hire consultants from Accenture Plc and Infosys Ltd. to integrate it with other programs they run.

Web-Friendly

Yet as companies swap older enterprise resource planning systems with newer cloud-computing software, SAP and Oracle have struggled to offer more Web-friendly applications. Oracle was years late to market with its Fusion applications, meant to knit together its acquisitions of Siebel, PeopleSoft and other companies with a more modern user interface and software code.

Responding to the threat, Oracle is making forays into cloud computing. It agreed last month to buy Taleo Corp., a maker of online human resources software, for $1.9 billion. In January, Oracle acquired RightNow Technologies Inc. for $1.5 billion to gain online customer-service software. The company has also announced a service called the Oracle Public Cloud to run Fusion applications in Oracle’s data centers.

“We are well positioned as the only vendor with a standards-based, fully integrated suite of modern applications which can be deployed on premises or on a public or private cloud,” Oracle President Mark Hurd said in an e-mailed statement.

SAP’s Push

SAP also has reacted to the competition with its own efforts to take on newer companies -- and Oracle -- in the cloud. The German software maker on Feb. 23 closed its $3.4 billion acquisition of SuccessFactors Inc., whose online software for managing employees’ performance has more than 3,500 customers and 15 million users.

The company is directly targeting Oracle’s database customers with its own data-analysis software, called Hana. Eventually, large enterprise customers will be able to run Hana with SAP’s applications outside their own data centers, Chief Technology Officer Vishal Sikka said in an interview.

“In five years there’s no doubt the majority of deployments will be in the cloud,” he said.

Activision’s Mix

Activision still uses Oracle applications and databases to run its operations, financial planning and data analysis, Schmid said. Still, the Santa Monica, California-based company chose Salesforce’s Service Cloud, Chatter social network and Radian6 marketing software to respond to gamers’ problems and analyze data from players of the “Call of Duty” war game to refine future versions.

Salesforce’s software helps Activision analyze data flowing in from as many as 3 million simultaneous online “Call of Duty” players, then feed the findings to the company’s game developers to improve future versions, Schmid said.

Software-as-a-service companies like Salesforce and Workday will continue to pressure traditional software companies like Oracle in the months and years to come, said Mike Volpi, a partner at venture capital firm Index Ventures.